Gold: Kill the chicken to scare the monkey

10-Year Treasury yields retreated from resistance at 2.0%, helped by increased Chinese purchases.

10-Year Treasury Yields

Evidenced by the Yuan falling against the US Dollar. Breach of recent support 14.15 would warn of another test of primary support at 14 cents.

Chinese Yuan CNY/USD

Further Yuan weakness and lower Treasury yields are likely after President Trump signed the Hong Kong Human Rights & Democracy Act into law. This puts China in a difficult position. China’s foreign ministry:

“We urge the United States not to continue going down the wrong path, or China will take countermeasures and the U.S. must bear all the consequences.”

Their economy is hemorrhaging and they badly want an interim trade deal but failure to respond to the latest US action would reveal a weak hand. Expect an indirect response as in the popular idiom – kill the chicken to scare the monkey – making an example of someone in the hope that it will deter others.

Gold continues to test support at $1450 but lower Treasury yields (from a weaker Yuan) would strengthen demand as it lowers the opportunity cost of holding Gold. Breach of support is unlikely unless Treasury yields again test resistance at 2.0%.

Gold (USD/ounce)

Silver is similarly testing support at $16.80/ounce but we are unlikely to see a follow-through unless Treasury yields strengthen.

Silver (USD/ounce)

Australia’s All Ordinaries Gold Index continues in a downward trend channel. An up-tick in the Trend index and short-term support at 6500 suggest a rally to test the upper trend channel, around 7000. Breakout from the trend channel, while still unlikely, would warn that a bottom is forming. Breach of support at 6500 is more likely and would offer a short-term target of 6000.

All Ordinaries Gold Index

Patience

Gold remains in a long-term up-trend. The current correction may offer an attractive entry point but we first need to confirm that the up-trend is intact.

ASX 200: Don’t argue with the tape

“A prudent speculator never argues with the tape. Markets are never wrong; opinions often are.” ~ Jesse Livermore

The ASX 200 broke resistance at 6800, signaling a fresh advance with a short-term target of 7200. Declining Trend Index peaks still warn of secondary selling pressure at present. Expect retracement to test the new support level at 6800. Respect of support would confirm the advance.

ASX 200

But divergence from fundamentals is growing.

NAB cut their GDP forecast to 1.5% in their November Forward View.

Housing markets in Sydney and Melbourne have recovered somewhat, but building approvals for houses remain 21% below their 2017 high and 57% for apartments. Construction activity is likely to remain low.

Exports are strong, boosted by increased LNG exports, but iron ore prices are falling. Currently testing short-term support at 80, our long-term target for iron ore is $65/metric ton.

Iron Ore

Business investment has slowed, causing wages to stagnate.

Australia: Business Investment

Retail sales weakened as a consequence, contracting for the first time since the early 1990s.

Australia: Retail Sales

Annual credit growth slowed to 2.5%, the lowest since 2010.

Banks were spooked last week by AUSTRAC pursuing Westpac for 19.5 million breaches of anti money-laundering and counter-terrorism regulations. The ASX 300 Banks index broke support at 7600, completing a double-top reversal, but this week they consolidated in a narrow range. Expect retracement to test resistance at 7600. Declining peaks on the Trend Index, however, continue to warn of selling pressure. Respect of resistance would confirm the decline, with a target of 6800.

ASX 300 Banks

The ASX 200 REITs index broke out of its descending triangle, signaling another advance. Financial markets are searching for yield.

ASX 200 REITs

The ASX 300 Metals & Mining index penetrated its descending trendline, suggesting that a base is forming. Expect another test of support at 4100 (neckline of a large head-and-shoulders reversal pattern). Breach would offer a target of 3400. The Trend Index penetrated its descending trendline but a peak near zero would warn of continued selling pressure.

ASX 300 Metals & Mining

We shouldn’t argue with the market but we should wait for confirmation; bull and bear traps are common. Investors, bear in mind that market risk remains elevated. I leave you with this quote from Westpac in their recent credit update:

For businesses, the economic backdrop has become more challenging. The global economy is slowing and household spending is soft. In this environment business investment in the real economy has lost momentum across the non-mining sectors – which will weigh on credit demand.

….and on jobs, wages growth and household spending.

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

S&P 500: A cautious advance

A monthly chart shows the S&P 500 cautiously advancing after breaking resistance at 3000. Short candle bodies reflect hesitancy but Trend Index troughs above zero remain bullish.

S&P 500

ETF flows reveal risk-averse investors, with outflows from US Equities in the last week and a relatively much larger outflow from Leveraged ETFs. Inflows are mainly into Fixed Income and Inverse.

ETF Flows

Year-to-date flows tell a similar story, with outflows from Equities and into Fixed Income. So where is the money flow into equities coming from?

Twitter: Buybacks

Meanwhile, the Fed has eased up on their balance sheet expansion now that the PBOC is back in the market. But broad money (MZM plus time deposits) continues to spike upwards, warning that the Fed is trying to head off a potential liquidity squeeze. They are not always successful. A similar spike occurred before the last two recessions.

Fed Assets and Broad Money Growth

The personal savings rate is climbing. Far from a positive sign, this warns that personal consumption, the largest contributor to GDP, is likely to fall.

Saving Rate

This is a dangerous market and we urge investors to be cautious.

ASX 200: Banks break support

ASX 300 Banks index broke support at 7600, signaling a correction to test primary support at 6750. Declining peaks on the Trend Index confirm selling pressure.

ASX 300 Banks

The ASX 200 REITs index has formed a bearish descending triangle. Breach of support at 1600 would warn of a correction. It seems unlikely that would reach primary support at 1350 because financial markets are searching for yield.

ASX 200 REITs

The ASX 300 Metals & Mining index is also faltering. Expect another test of support at 4100 (neckline of a large head-and-shoulders reversal pattern). Breach would offer a target of 3400. The Trend Index penetrated its descending trendline but a peak near zero would warn of continued selling pressure.

ASX 300 Metals & Mining

Iron ore found short-term support at 80 but continues its primary down-trend. Our long-term target is 65.

Iron Ore

The ASX 200 retreated from resistance at 6800. Declining Trend Index peaks only indicate secondary selling pressure at present. Expect another test of support at 6400. Breach is still unlikely but would offer a target of 5400.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

Stretching credulity

Fed Chairman, Jay Powell says the US economy is strong.

But they have cut interest rates three times this year.

And it’s all hands to the pump below decks. The Fed expanded their balance sheet by $288 billion since September and broad money (MZM plus time deposits) growth has almost doubled to $1.4 trillion this year.

Fed Assets and Broad Money Growth

Donald Trump says that a Phase 1 trade deal has been settled with China.

But the two parties can’t seem to agree on whether China’s agricultural purchases are part of the deal (China is reluctant to commit to a $ amount).

Nor can they recall whether rolling back tariffs was part of the deal. China would like to think so but Trump is now threatening to increase tariffs if a deal isn’t signed.

Fundamentals show that activity is contracting. Industrial production is falling.

Fed Assets and Broad Money Growth

Freight shipments are contracting.

Cass Freight Shipments

And retail sales growth is declining.

Advance Retail Sales

Yet Dow Jones Industrials just broke 28,000 for the first time, while Trend Index troughs above zero show long-term buying pressure.

Dow Jones Industrial Average

Paul Tudor Jones

“Explosive” is the right word.

ASX 200 diverges from fundamentals

Seasonally adjusted labour force estimates show a decline in October 2019:

  • Employment decreased by 19,000 to 12,919,200 people
    (full-time -10,300 and part-time -8,700).
  • Unemployment rate increased by 0.1 pts to 5.3%.
  • Monthly hours worked in all jobs decreased by 2.8 million hours to 1,783.9 million hours.

The leading indicator of employment has been predicting a down-turn in employment for some time, recording its sixteenth consecutive monthly fall in November.

Australia: Leading Employment Indicator

Job advertisements have also declined since late 2018.

Australia: Job Ads & Vacancies

Falling employment has a knock-on effect in other areas of the economy:

According to Tony Weber, chief executive of the FCAI, new vehicles have now seen the nineteenth consecutive month of decreasing sales in the Australian market, with October 2019 sales down 9.1% compared to October 2018.

“Year to date sales of new motor vehicles in 2019 are almost 78,000 units (eight per cent) lower than the same period in 2018…”

Retail sales are also soft:

In volume terms, the seasonally adjusted estimate for the September quarter 2019 fell 0.1%. This follows a 0.1% rise in the June quarter 2019, and a 0.1% fall in the March quarter 2019.

But the ASX 200, seemingly unperturbed, is testing resistance at 6800. Breakout would signal a primary advance with a target of 7200. Breach of support at 6400 seems unlikely but would warn of a decline with a target of 5400.

ASX 200

There are, however, signs of weakness in the largest two sectors.

ASX 300 Banks index penetrated its rising trendline, warning of a correction. Declining peaks on the Trend Index indicate secondary selling pressure. Follow-through of the index below 7600 would strengthen the bear signal.

ASX 300 Banks

A hanging man candlestick warns the ASX 300 Metals & Mining index is likely to again test support at 4100 ( the neckline of a large head-and-shoulders reversal pattern ). A Trend Index peak near zero would indicate continued selling pressure.

ASX 300 Metals & Mining

Iron ore continues its primary decline, since breaking support at 90. Our long-term target is 65.

Iron Ore

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook. But ASX 200 breakout above 6800 would force us to re-examine our outlook.

ASX banks profit squeeze but miners bullish

Iron ore continues its primary decline, having broken support at 90. Expect a test of the long-term target at 65.

Iron Ore

ASX 300 Metals & Mining index rallied during the week. I was expecting another test of support at 4100 ( the neckline of a large head-and-shoulders reversal pattern ) but a higher Money Flow trough near zero indicates buying pressure. A large divergence between iron ore and the Metals & Mining index warns that something is afoot.

ASX 300 Metals & Mining

The CEOs of ANZ, Westpac and NAB this week all mentioned pressure on net interest margins in their earnings announcements.

Net Interest Margins

But as this chart of fee and other income to March 2019 shows, it is not just interest margins that are under pressure. Transaction fees are steadily declining, while low book growth in recent years has resulted in declining lending fees. The recent sharp fall in other fee-based activity is also unlikely to recover as banks shed their troublesome wealth management business units.

Majors: Fees
Source APRA: Major Banks

ASX 300 Banks index retreated below its rising trendline, warning of a correction. Declining peaks on the Trend Index indicate secondary selling pressure. Follow-through below 7600 would strengthen the signal.

ASX 300 Banks

REITs have been experiencing selling pressure in the last few months despite the scramble for yield, with descending peaks on Twiggs Money Flow and a bearish descending triangle. Breach of support at 1600 would offer a short-term target of 1500.

ASX 200 REITs

ASX 200

Financials are mildly bearish but miners are surprisingly bullish. An ascending triangle on the ASX 200 signals buying pressure, while the declining peaks on Money Flow are modest in relation to the overall up-trend. Breakout above 6800 would signal another advance with a target of 7200. Breach of support at 6400 is now less likely but would warn of a decline with a target of 5400. As always, the two biggest sectors, Financials and Mining, are likely to point the way.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook. But ASX 200 breakout above 6800 would force us to review our outlook.

ASX: Iron ore breaks support

Iron ore broke support at 90, falling sharply to $83.55/ton. Expect a decline to test the long-term target at 65.

Iron Ore

ASX 300 Metals & Mining index rallied slightly but another test of support at 4100 is likely — the neckline of a large head-and-shoulders reversal pattern. Declining peaks on the Trend Index warn of selling pressure. Completion of the head-and-shoulders reversal would offer a target of 3400.

ASX 300 Metals & Mining

Residential mortgage activity is recovering in response to recent rate cuts but banks are under pressure, with lower interest margins, lower fee income and high remediation costs from malpractices exposed by the Royal Commission.

ANZ reported a flat full-year profit at $6.4 billion but revealed margin and retail fee pressure:

“The halving of the Reserve Bank’s cash rate during the year was the major factor in a 12 basis point compression of ANZ’s net interest margin to about 1.72 per cent. The net interest margin is the difference between the bank’s funding costs and what it charges for loans, and it’s as low as it has ever been – in the mid-1990s the margin was about 4 per cent – with no reason to believe the pressure on margins will abate.” [Stephen Bartholomeusz]

ASX 200 Financials index met resistance at 6500. Declining peaks on the Trend Index now indicate selling pressure. Expect a test of primary support at 6000; breach would offer a target of 5300.

ASX 200 Financials

REITs recovered slightly from their recent sell-off but the descending triangle is bearish. A lower Trend Index peak would strengthen the bear signal. Breach of support at 1600 would offer a short-term target of 1500.

ASX 200 REITs

ASX 200

The ASX 200 continues to give mixed signals. An ascending triangle on the index chart is bullish, but declining peaks on the Trend Index warn of selling pressure. Breakout above 6800 would signal another advance, while breach of support at 6400 would warn of a decline with a target of 5400. The two biggest sectors, Financials and Mining, are likely to lead the way.

ASX 200

We maintain low exposure to Australian equities, with a focus on defensive and contra-cyclical stocks, because of our bearish outlook.

“A hell of a mess in every direction” – Paul Volcker

The S&P 500 strengthened on Friday, closing at a new high of 3067. Volatility (21-day) crossed below 1%, signaling that risk is easing. Money Flow strengthened; a trough above zero suggests another advance. The medium-term target is 3250.

S&P 500

Dow Jones Industrial Average is weaker, with Money Flow having dipped below zero, but breakout above 27,400 would signal another advance. Target for the advance is 29,400.

DJ Industrial Average

“We’re in a hell of a mess in every direction,” is how Paul Volcker, the former Fed Chairman describes it.

Equities are making new highs, while the Fed cuts interest rates. Donald Trump is effectively dictating monetary policy. This could only end badly.

Unemployment and initial jobless claims are near record lows.

Unemployment and Jobless Claims

Inflationary pressures are moderate, with average wage rates growing between 3.0% and 3.5% (production and non-supervisory employees).

Average Wage Rates

GDP growth is slowing, however, and likely to fall further according to our advance indicator (estimated hours worked).

Real GDP and Estimated Hours Worked

Payroll growth is also slowing. While this has been explained as a result of record low unemployment (new employees may be hard to find) it is likely that rising uncertainty has played a big part.

Payroll Growth and Fed Funds Rate

The 3-month TMO of Non-Farm Payrolls kicked up to 0.58%, above the amber risk level of 0.5%.

Payroll Recession Warnings

With 73.5% of stocks having reported for Q3, the price-earnings ratio remains elevated. A reading above 20 warns that stocks are over-priced, especially because expected earnings growth is low.

P/E of Highest Earnings

If we project nominal GDP growth (including inflation) at 3.5% and buyback yields at 3.0% (Q2: 3.26%) that gives us anticipated growth of 6.5%. Add dividend yield of 2.0% (Q2: 1.96%) and we can expect stocks to yield a total return (dividends plus growth) of 8.5%.

Nominal GDP and Estimated Hours Worked * Average wage rate

But that assumes that current price-earnings multiples are maintained. Any downward revision, from earnings disappointments, would most likely result in a negative return.